International Harmonisation of Financial Reporting is both Desirable and Possible Essay Example

International Harmonisation of Financial Reporting is both Desirable and Possible

Introduction

There is continuing debate on whether harmonisation of financial reporting desirable and feasible. For instance, in one article, Buttell (2009) argues that the adoption of International Financial Reporting Standards (IFRS) forms part of the question of whether having global accounting standards is practical or sensible. There are several reasons that are given by different authors in support of or against the standardisation of financial reporting. This essay will delve into the debate on the aforementioned topic and argue that international harmonisation of financial reporting is both desirable and possible. The standpoint in the essay is based on a critical evaluation of works that have argued for and against the harmonisation of accounting standards across the world.

Critical evaluation of arguments for and against the harmonisation of accounting standards globally

Proponents of having a globally harmonised financial reporting system cite the benefits of having such as system, especially with the advent of a globalised world. According to Saha (2012, p. 7), after the World War II, member states of the European Union developed their own accounting regulations and rules for their listed firms to utilise in the preparation of financial reports. What this meant that different countries across the world had their own financial reporting rules and regulations. However, this raised concerns in regard to whether it was possible to compare financial reports from nations. Obviously, if the financial reports were prepared under the guidance of different accounting rules, investors as well as other stakeholders would find it difficult to effectively compare the reports and make important decisions (Saha 2012, p. 7). Therefore, the benefits of harmonised financial reporting rules are related to the ease and flexibility with which financial reports in different countries can be compared, particularly for companies that operate globally. In contrast, the demerits of harmonised financial reporting are related to issues such as lack of acceptance by some countries and the cost implication of meeting international financial reporting requirements.

The first benefit of harmonised financial reporting is that harmonisation makes it possible to achieve greater comparability (Mohr 2016). This is because of the Comparisons can be made between firms that make use of the same standards to organise their financial statements more accurately. This is particularly important when making comparisons between two or more companies that are located in different countries. As noted by Saw (2011, p. 194) and Saha (2012, p. 7), if financial reporting and accounting were similar in all businesses all over the world, making comparisons between companies would easier for both investors and stakeholders.

Another advantage of harmonised financial reporting is the increased flexibility that is associated with such harmonisation (Mohr 2016). For instance IFRS utilises a principles-based approach instead of a rules-based system. The use of a principles-based approach implies that the aim of each standard is to make a rational judgement or decision, with many ways to make that decision. This allows firms the freedom to adapt the international standards to their own particular situations. This is because harmonisation tends to imply the process of increasing the compatibility of practices in accounting by defining bounds to the degree of variation between the practices (Watkins 2009, p. 109).

Having standards for financial reporting may also call for disclosure that goes beyond what is required by the law of a given country (Tulsian 2006, p. 3.2). This means that harmonised financial reporting guidelines can promote reporting beyond the statutory requirements.

The demerits of harmonising financial reporting can be related to the reasons why harmonisation may be deemed undesirable and not possible. The first point is that harmonisation imposes a restriction on the selection of alternative treatments. Where are allowed alternative treatments it is possible to make a recommendation to particular based on the nature of the issue. But with standardised accounting standards, this may not be possible. Such as scenario can be related to Singleton-Green’s (2016, p. 32) assertion that accounting standards tend to stifle innovation to some extent and at the same time promote it to some extent. In regard to stifling innovation, it can be argued that having certain standards to be followed kills the innovativeness with which different financial scenarios or problems can be treated.

Another demerit of having harmonised financial reporting standards is the rigidity that is evident in such settings. With harmonisation, there seems to be a demand for rules, which reduces the possibility using technical judgement in the making of decisions (Tulsian 2006, p. 3.2).

The third disadvantage of harmonisation is that international standards cannot overrule the statutes that have bee defined in given country. This means that in order for international financial reporting practices to be practical, they must be attuned with the statutes that have been set in each country (Tulsian 2006, p. 3.2). This makes the application of such standards unpopular. Consequently, some countries, the United States included, have not adopted IFRS (Mohr 2016).

Why international harmonisation of financial reporting is both desirable and possible

Going forward, it can be argued that the merits and demerits of harmonisation of financial reporting almost outweigh each other. However, there are several indications that harmonisation is not a bad thing. As noted by Singleton-Green (2016, p. 32), having standards such as those contained in the IFRS can promote innovation that spread very quickly across different countries. It is however important to note that it has also been mentioned above having harmonised financial reporting standards may stifle innovation. Therefore it all depends on which side one looks at. From the point of promoting innovation in accounting, it can be argues that harmonisation is desirable and possible because of the existing standards such as IFRS that different countries have to use.

As well, various studies that have been done on the standardisation accounting and financial reporting practices have suggested that standardisation has positive effects. For instance, Csebfalvi (2012) argues that businesses that have adopted the use of international standards in their accounting practices have attained a higher and statistically significant coefficient compared to companies that use local accounting regulations and rules. What this means that harmonisation is a desirable aspect for the sake of companies achieving success in their endeavours. More importantly, even though some countries such as the United States are yet to adopt IFRS, the successful adoption of harmonised standards within regions such as the European Union (Saha 2012, p. 7) means that it is possible to have harmonised financial reporting practices. The same argument is supported by the point that the Securities Exchange Commission of the US was at some point pushing for the adoption of IFRS (Buttell 2009).

Conclusion

In conclusion, whether international harmonisation of financial reporting is both desirable and possible is still subject to discussion. This is based on the advantages and disadvantages that are associated with harmonisation of accounting and financial reporting practices. However, this essay has argued that because of the advantages and arguments that have been in support of harmonisation of accounting standards, harmonisation of financial reporting is both desirable and possible.

References

Buttell, AE 2009, ‘The hard sell: SEC in a quandary over its push for IFRS’, The Investment Professional, vol. 2, no. 1, pp. 34-43.

Csebfalvi, G 2012, ‘The effects of international accounting standardization on business performance: evidence from Hungary’, International Journal of Business and Management, vol. 7, no. 9, pp. 20-27.

Mohr, A 2016, ‘International Financial Reporting Standards — Advantages & Disadvantages’, Hearst Newspapers, viewed 7 September 2016, <http://smallbusiness.chron.com/international-financial-reporting-standards—advantages-disadvantages-2167.html>.

Saha, H 2012, Why didGermany, France and the Netherlands choose to adopt International Accounting Standards for their listed company consolidated reports? Viewed 7 September 2016, <https://books.google.co.ke/books?id=y9cTBQAAQBAJ&pg=PA7&dq=challenges+of+having+different+accounting+standards&hl=en&sa=X&redir_esc=y#v=onepage&q=challenges%20of%20having%20different%20accounting%20standards&f=false>.

Saw, P 2011, ‘A global accounting standard: the holy grail?’, In SO Idowu & C Louche (eds), Theory and practice of corporate social responsibility, Springer Verlag, Berlin, pp. 192-265.

Singleton-Green, B 2016, ‘Necessity is the mother of invention’, By All Accounts, p. 32.

Tulsian, PC 2006, Financial accounting, Dorling Kindersley (india) Pvt. Ltd.

Watkins, J 2009, Financial operations, CIMA Publishing, Oxford.